A crypto wallet is a type of digital wallet. Much like how a physical wallet often stores its owner’s personal information and bank cards used to access their bank account and funds, a crypto wallet stores a user’s public address and private key for accessing their crypto address and making crypto transactions.
Unlike a physical wallet that stores physical currencies, however, a crypto wallet does not store any actual cryptocurrencies. In this sense, it is like a bank account, with no physical money contained within. How much crypto a user has in their wallet is recorded in a distributed ledger, such as the Bitcoin or Ethereum blockchain.
What is a hot wallet?
Hot wallets are wallets connected to the Internet, which means that the cryptocurrency holdings in a hot wallet are transferable. Crypto holders can use hot wallets to transfer tokens directly to other wallets. On the other hand, hot wallets may encounter more security issues since they are Internet-connected and face the possibility of being accessed and drained by another party.
The safety and security of a hot wallet are largely dependent on its user’s behavior. Any items stored in a hot wallet are vulnerable to attack because its public and private keys are stored on the Internet. You can lose your tokens if someone gains access to your device or if they get a hold of your private key. It is advisable to frequently back up certain types of hot wallets, as problems with the wallet software on your computer or mobile device could erase your holdings.
Types of hot wallets
Full wallets: A full crypto wallet, like Bitcoin Core, is a wallet that runs a full node and implements all the functionalities of a specific cryptocurrency and blockchain. In other words, a Bitcoin Core wallet is a node on the decentralized Bitcoin blockchain, and each of these full nodes separately follows the exact same rules to maintain the validity of the Bitcoin blockchain.
Light wallets: A light wallet, like Electrum, is a wallet connected to a server containing a full node. Light wallets are often found in desktop, mobile and online formats, such as websites and applications. Light wallets are downloadable but not linked to or affiliated with any exchanges. However, your cryptocurrency is still vulnerable to hacking because a hacker who gains access to your computer could theoretically drain your wallet via the software application if they can also access your private key.
Centralized wallets: A centralized wallet, like a Huobi Exchange Account, is a wallet supported by a centralized crypto exchange. The centralized exchange plays the role of a trusted third party that monitors and secures assets on behalf of the buyer and seller. Instead of you having to keep the private key to your tokens, centralized wallets do that for you, and you hold the key to utilizing the centralized wallets to access your assets. Centralized exchanges like Huobi offer 2FA security, account recovery, and in some cases, may make it possible to reverse certain kinds of losses.
What is a cold wallet?
A cold wallet is disconnected from the Internet and is the safest option for cryptocurrency storage. Cold wallets can be paper wallets or hardware wallets. A paper wallet is a generated token wallet address (a very technical process not suitable for beginners), and you would usually write down your keys on a piece of paper. There are also stored value cards or tokens with pre-generated addresses and keys you can buy.
A hardware cold wallet, like the Ledger Nano S or Trezor, is much easier to use. Your crypto addresses and keys can be kept in a USB drive device or even printed out on a piece of paper stored in a bank or a safe and only the person who possesses the USB drive and private key (usually printed on paper) can access the assets. Many large token investments are stored in hardware cold wallets.
Due to the risks hot wallets present, experienced investors typically keep only a small amount of assets to be spent or traded in the near future in their hot wallets. They keep the rest of their tokens in more secure cold wallets, sometimes spread out among several cold wallets. Read our guide to learn how to keep your crypto assets secure!